On Tesla, Goldman, And The Failure Of Imagination

Mark Rogowsky
, ContributorI write about technology, trends and companies on the leading edge.Opinions expressed by Forbes Contributors are their own.

A Goldman Sachs analyst named Patrick Archambault did what no one else has been able to in 2013: He put a stop to the rally in shares of
Tesla Motors, sending them down 14% with a bearish forecast for the company. What's notable about Archambault's prediction is not that Goldman can still move markets, but rather that it can do so even when the underlying work is so unlikely to reflect reality. In the case of Tesla, predictions about the future are obviously subject to great uncertainty. It's strange then that the Goldman report creates three scenarios within a remarkably narrow band that very likely fails to reflect the range of possibilities. Archambault then doubles down on his false precision to create a target price for the stock of $84.

Why do they call it research?

The Goldman report is 53 pages long and the Tesla portion is boiled down to about one paragraph. In it, Archambault posits that the company will sell either 105,000, 150,000 or 200,000 cars in three different scenarios. All presume Tesla is already shipping it's third-generation car, a BMW 3-series class vehicle the company has promised to offer at a starting price of $35,000. The company's current vehicle, the Model S sedan, starts at $62,400 after the federal tax credit (which isn't included in the calculation for the next-gen vehicle because Tesla expects it to be gone by then), slotted in price between BMW's 5 and 7 series models.

Tesla plans on adding an SUV to the lineup next year as well and is targeting a total production that should exceed 40,000 in 2015. The company is currently building more than the 400 vehicles a week it needs to meet its 2013 goal of 21,000 cars and CEO Elon Musk told
Bloomberg last week, by the end of next year, production is “going to 800 a week. I’m very confident we’ll get there.”

If we compare Tesla to BMW's U.S. sales, we can expect the third-gen Tesla to outsell the Model S by at least the 3:2 margin that the 3-series BMW outsells the combined 5 and 7 series. But truthfully, the numbers should skew much higher. Model S is physically the size of the 7 series and most buyers opt for a configuration priced like one, too. In BMW land, the sales gap between 3s and 7s is actually 9:1. That will matter a great deal in the U.S., but even more so in Europe where large cars are comparatively rare and SUVs like the Model X even more so.

While Archambault is right to worry about "sustainability of demand longer term," he nevertheless is fairly confident the Model S and X will combine for 50,000 in sales globally. Tesla itself hasn't said so yet, but given early sales success in the U.S., it seems likely that's the case. The S will sell more than 15,000 in the U.S. alone this year with European deliveries beginning soon and Asia targeted for year end. While forecasts around pricey vehicles like this are tricky, the large luxury sedan category in the U.S. alone accommodates five-figure sales from Mercedes,
Lexus and BMW. Porsche and
Audi together account for another 15,000. If you then add in luxury SUVs and include Infiniti and Cadillac there, you have another 100,000+ vehicles.

How then does the report conclude that the best case scenario is for Tesla's inexpensive line -- which will also include a SUV/crossover to go with the sedan -- will only outsell the luxury models by at most 3:1? Keep in mind the $35,000 Tesla will save the average owner $50-100 month on gas and maintenance. So it not only will compete with the BMW 3-series and entry-level Lexus, Mercedes and Audi products, but also a portion of the high-end Honda Accord and Toyota Camry markets. I mention those because they sell north of 700,000 per year domestically. Now none of this suggests Tesla is going to dominate any of these categories, but rather that it isn't difficult to pull these numbers from Good Car Bad Car and to then imagine the company moving 100,000 of its lower priced vehicles in the U.S. alone. That would represent a 5:1 ratio versus the Model S/X and seems more likely rather than less.

Adding up some numbers

So if we take those figures and do some extrapolation, let's assume the U.S. accounts for an equal share of both Tesla's high and low end. Therefore, if 20,000 of the 50,000 expensive vehicles are sold here and 100,000 of the less expensive ones are, that suggests worldwide demand of 250,000 of the third-gen Tesla. I'm already well outside of the "best case" Goldman forecast and arguably this is still not a true best case scenario. Is it entirely conservative? No, but that's not really the point. Entirely conservative is to say that Tesla will find it difficult to move more than 30,000 vehicles and deliver the third-gen product at a higher price than intended, limiting sales to perhaps another 100,000 beyond that. That would put my forecast in unit sales above Archambault, but doubtless would result in less profit.

If, however, the stars come remotely into alignment, Musk is going to find his company pushing production toward his goal of capacity at the company's Fremont, Calif. plant, which was 500,000 back when it made cars for GM and Toyota. Even using my "middle case" of 350,000 vehicles and extrapolating Goldman's "best case" for Tesla stock, I wind up with a $200 per share price. That's assuming I stick with the same multiple as Archambault.

It's worth noting that while bets against Tesla have shrunk a bit in recent months as massive losses have been incurred by those making them, there are still about 20 million shares held short, nearly 17% of the total outstanding. Those bets may prove wiser than I. But Tesla is already racing toward more than $3 billion worth of auto sales next year and it's arguably still in first gear. Spectating seems like a prudent course of action. Betting against just seems like a lack of imagination.